How to treat video material with non-square pixels
I misinterpreted your question, and I thought you were going to create a DVD. My bad, I didn't read thoroughly.  

For simply re-encoding a DVD to a video file, such as an MP4 or an AVI, I wouldn't use Blender at all. Exactly what to use, depends on your OS. If you just need to re-encode, with minor or no filtering, I'd suggest Avidemux, which is available for multiple operating systems and has an easy to understand GUI. If you're comfortable with command line tools, there's always FFmpeg. Both Blender and Avidemux use FFmpeg as a backend to encode video, but neither of them has support for everything FFmpeg can do; most notably not all combinations of codecs and container formats are available.  

For the scaling part, I'd say do as little scaling as possible. Especially avoid upscaling. If you use a container format that has native support for aspect ratio settings, you shouldn't have to do any scaling at all. MP4 and MKV are the safest bet, as they have aspect ratio support, and AVI can be made to support it with some trickery, but not all players will understand it. FFmpeg and mencoder can write AVI files with aspect ratio settings.